1.Production Possibilities Frontier 2.Supply and Demand 3.Currency Market 4.AD-AS Model 5.Loanable...
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Transcript of 1.Production Possibilities Frontier 2.Supply and Demand 3.Currency Market 4.AD-AS Model 5.Loanable...
1. Production Possibilities Curve 2. Supply 3. Demand 4. Dollars market/currency 5. Money market
6. Loanable Funds 7. Phillips Curve 8. Ceiling 9. Floor 10. ADAS with SRAS and LRAS
1. Production Possibilities Frontier2. Supply and Demand3. Currency Market4. AD-AS Model5. Loanable Funds Model6. Phillips Curve7. Money Market
1
• Assumptions:– Full Employment– Fixed Resources and Technology
• Movements– Along curve shows opportunity cost– Outward shift illustrates economic growth– Inward shift indicates destruction of resources
• Producing Capital Goods will lead to greater economic growth than producing consumer goods. (Butter will lead to more growth than guns)
Production Possibilities Graph
Production Possibilities Graph
Capital Goods
Consumer Goods
A
B
CD
E
Points A,B,C, are efficient pts.Point D is underutilizationPoint E is economic growth
May Lead to mostFuture growth
May Lead to mostFuture economic growth
2 Supply and Demand
• Demand Changes when:– Income changes– Related Products, complements and substitutes,
(price or quality change)– Expectations (future price change)– Consumers (more or less added)– Tastes, Fads, Preferences change
Demand Increase: As Demand Increases, Price and Quantity Increase as well.
P1
P2
Q1 Q2
S1
D1
D2
Price
Quantity
Demand Decrease: As Demand Decreases, Price and Quantity decrease as well
D1
D2
S1
P1
P2
Q1Q2
Price
Quantity
• Supply Changes When:– Input prices change (resources and wages)– Government (tariffs, quotas, and subsidies)– Number of sellers change– Expectations (about price and product profitability
change)– Disasters (weather, strikes, etc..)
Supply Increase: As Supply Increases, Quantity Increases, but Price Falls.
Price
QuantityQ1 Q2
P1
P2
S1S2
D1
Supply Decrease: As Supply Decreases, Quantity Decreases, but Price Increases.
Price
Quantity
S1
S2
D1
P1
P2
Q1Q2
P
Qd
SD
Price Floor
P
Surplus
1. Price set above equilibrium
2. Producers produce too much
3. Consumers demand less than what is produced
4. Surplus created – Qs > Qd
P
Qd
SD
Price Ceiling
Shortage
P
QdQs
1. Price set below equilibrium
2. Consumers demand too much
3. Producers produce too little
4. Shortage created – Qd > Qs
3 Currency Market
Currency Terms• Appreciation: Currency is increasing in
demand (stronger dollar)– U.S. Currency will appreciate when more
foreigners: travel to the U.S., buy more U.S. goods or services, or buy the U.S. dollar to invest in bonds
Currency Terms• Depreciation: Currency is decreasing in
demand (weaker dollar) Being SUPPLIED in exchange for other currency.– U.S. Currency will depreciate when fewer
foreigners: travel to the U.S., buy fewer U.S. goods or services, or sell the U.S. dollar to invest in their own bonds
4 AD-AS Model
Aggregate Demand
AD (C + I + G + X)
PriceLevel
Real GDP
Downward sloping:1. Real-Balances Effect: change in purchasing power
2. Interest-Rate Effect: Higherinterest rates curtail spending
3. Foreign Purchase Effect: Substitute foreign products for U.S. products
Aggregate Demand
• Determinants of AD:– C + I + G + Nx– An increase in any of these will increase AD and shift
the curve to the right.
– A decrease in any of these will cause a decrease in AD and shift the curve to the left
Aggregate Demand Determinants
• Consumption– Wealth– Expectations– Debt– Taxes
• Investment– Interest Rates– Expected Returns
• Technology• Inventories• Taxes
• Government– Change in Gov. spending
• Net Exports– National Income Abroad– Exchange Rates
Aggregate Supply Factors:
• R: resource prices (wages and materials, as well as OIL)
• A: actions by government (Taxes, Subsidies, more regulation)
• P: productivity (better technology)
Aggregate Supply
• Short Run:– Assumes that nominal wages
are “sticky” and do not respond to price level changes.
– Is Upward sloping as businesses will increase output to maximize profits
• Long Run:– Curve is vertical because the
economy is at its full-employment output.
– As prices go up, wages have adjusted so there is no incentive to increase production.
Real GDP or Real output or Real income
Recessionary Gap
Inflationary Gap
5 Loanable Funds
Loanable Funds Market
Loanable funds are used for three purposes1. Business Investment2. Government deficit financing3. International Investment or lending
Demand for Loanable Funds
Demand for Loanable Funds Curve
The demand for loanable funds shows the relationship between the real interest rate and the quantity of loanable funds demanded. It shows that the quantity of loanable funds will be lower at a high real interest rate than at a lower real interest rate.
Loanable Funds Market
Loanable funds come from three places1. Private savings2. Governmental budget surpluses3. International borrowing
Supply of Loanable Funds
Supply of Loanable Funds Curve
6%
4%
40 60LF
i
Equilibrium in the Loanable Funds Market
Shifts in Demand for Loanable Funds
The major determinant of the demand for loanable funds is expected profit. When the expected profit changes, the demand for loanable funds changes. The greater the expected profit of new capital, the greater is the amount of investment and the greater is the demand for loanable funds. When the expected profit increases and we earn more from our investment, the more affordable it becomes to borrow loanable funds – even when the interest rate.
Shifts in Supply of Loanable Funds
1. Disposable income (shifts the supply of loanable funds)
2. Wealth (shifts the supply of loanable funds)
3. Expected future income (shifts the supply of loanable funds)
4. Default risk (shifts the supply of loanable funds)
6 Phillips Curve
7 Money Market